Salesforce: Is AI a 'Savior' or a 'Death Knell'?

On September 4th, after the U.S. stock market closed, the SaaS leader $Salesforce(CRM.US) released its Q2 FY2026 financial report. The performance for the quarter was relatively stable (or rather lackluster). There were no significant signs of accelerated growth, but excellent cost control squeezed out slightly better-than-expected profits. However, this does not change the core issues, and the guidance for the next quarter is also not impressive, leaving an overall weak impression. The detailed points are as follows:

1. Growth appears to accelerate, but mainly due to favorable exchange rates: On the growth side, the core business—subscription revenue grew by 10.6% year-on-year this quarter, showing some acceleration compared to 8.3% in the previous quarter, slightly exceeding market expectations by 1 percentage point. However, this is mainly due to the favorable tailwind of exchange rates. Over the past four quarters, the growth rate of subscription revenue at constant exchange rates has actually remained around 9%, with most of the growth fluctuations being due to exchange rate effects. (Since decimals are not disclosed, smaller differences may be erased).

2. Traditional business is mature, must seek growth from AI: Among the five major cloud segments, this quarter benefited from favorable exchange rates, with growth rates all increasing by 1% to 3% quarter-on-quarter. Structurally, traditional IT spending—the three major segments of sales, customer service, and marketing continue to grow only in single digits, with the nearly mature traditional business showing few highlights.

The platform cloud and data analytics segments, which are more closely related to AI, performed significantly stronger, with revenue growth rates of 17% and 13%, respectively. According to disclosures, the annualized revenue contributed by AI and data cloud has reached $1.2 billion, up from $1 billion in the previous quarter.

3. Leading indicators weaken quarter-on-quarter: The leading indicator—cPRO (short-term unfulfilled balance) nominal year-on-year growth rate is 11%, down about 1 percentage point from the previous quarter, with a similar slowdown in growth at constant exchange rates. This quarter's cRPO net increase was $2.9 billion, also narrowing by nearly 10% quarter-on-quarter compared to the previous quarter. This seems to suggest that Salesforce's new demand is showing signs of weakening.

4. Exchange rates drive steady improvement in gross margin: Although there is no substantial highlight in growth, this quarter Salesforce's gross margin performed well, increasing by 1.1 percentage points quarter-on-quarter. Behind this is partly due to the slight improvement in the core subscription business due to favorable exchange rates and scale effects, and also the return to normal of the service business's gross loss from the abnormally high point of the previous quarter.

Therefore, the actual gross profit for this quarter was nearly $8 billion, up 11.6% year-on-year, slightly outpacing the revenue growth rate.

5. Excellent cost control continues to squeeze profits: This quarter, Salesforce's total operating expenses were $5.66 billion, up 5.2% year-on-year, further slowing from 6.8% in the previous quarter, significantly lower than the growth rates of revenue and gross profit. By controlling expenses, an additional profit margin of nearly 2 percentage points was squeezed out. However, in terms of trends, due to the need to promote AI products, the growth rate of expenses has shown a trend of expansion.

Specifically, the largest marketing expenditure was $3.44 billion, up 6.8% year-on-year, with the demand to promote new products such as AI, the growth rate of marketing expenses has been rising continuously in recent quarters, but the absolute growth rate is still relatively low. R&D expenses also increased by 9.8% year-on-year, showing signs of acceleration.

6. Growth lacks highlights, but profits are still excellent: Due to the rebound in gross margin driven by favorable exchange rates, cost control is still excellent. This quarter, the GAAP operating margin increased by about 4 percentage points quarter-on-quarter to 22.8%, a record high. Operating profit increased significantly by nearly 31% year-on-year, and profit growth is still good.

The company is more focused on free cash flow profit, which was only $610 million at the seasonal low, down 20% year-on-year, significantly below expectations. Of course, due to the low absolute value, the seemingly large proportional difference is mainly due to the impact of repaying more accounts payable, which is not of great significance.

Dolphin Research's View:

From the above, Salesforce's performance this quarter is not bad, overall showing stable performance. In summary, actual growth is generally stable, with more fluctuations due to exchange rate effects. In the face of weak growth, the company has correspondingly reduced equity incentive expenses and controlled expense investment, releasing still impressive profits.

Broadening the perspective beyond these short-term performance results, the current issue facing the software industry and Salesforce is the growing concern in the market about AI potentially replacing traditional software or SaaS services. Since FY23, revenue growth has been declining continuously, with revenue growth below 10% for four consecutive quarters (at constant exchange rates). This indeed reflects that as a traditional SaaS giant, Salesforce, with a quarterly revenue scale of over $10 billion, finds it difficult to significantly drive overall growth without a new market or service with huge potential.

The problem is that the "all talk, no action" Agent business is still in its early stages, with more enterprise users only piloting rather than widely promoting it. Behind this, the functionality and experience of AI agents are still relatively rudimentary, with no obvious payment points being the fundamental reason (similar to the situation with Microsoft's Copilot). From this quarter's performance and guidance for the next quarter, the driving effect of AI Agents cannot yet be verified.

Looking ahead to the next quarter, the company expects revenue to grow by 8% to 9% year-on-year, with a constant exchange rate growth rate of 9%, remaining flat with this quarter and slightly below market expectations. The guidance for next quarter's cPRO growth at constant exchange rates is 10%, also consistent with this quarter. Therefore, although the company announced an average price increase of about 6% for most of its enterprise versions starting in August, it has not accelerated revenue growth. This also suggests that the driving force of AI Agents within the next quarter is still limited.

Additionally, the company's guidance for next quarter's diluted EPS is only $1.61, with a year-on-year growth of less than 2%. This suggests that investment in new businesses will increase significantly next quarter. Unlike this quarter, which still had the highlight of good profits, next quarter will be a situation where both growth and profits are lacking.

Overall, the company's currently weak main logic has not improved much after this performance. Although the company's current valuation is very low within the SaaS industry, with a pre-earnings market value corresponding to an expected FY26 free cash flow of only 16x to 17x, and a FY26 PS of only 6x, both at below-average levels within the SaaS industry. With core performance and prospects not being good, and AI agents being a story that can be told but with high uncertainty, Dolphin believes that CRM currently only has rebound value after a significant oversell and does not see opportunities for sustained upward movement.

The following is a detailed interpretation of this quarter's financial report:

I. Brief Introduction to Salesforce's Business & Revenue

Salesforce is a pioneer in the CRM industry (Client Relationship Management) in the U.S. and globally, being the first to propose the concept of SaaS, or software-as-a-service. The main feature of this model is the use of cloud services instead of localized deployment; subscription-based payment instead of one-time purchase payment.

Therefore, Salesforce's business and revenue structure mainly consist of two categories: ① Over 95% of revenue comes from various types of SaaS service subscription revenue; ② The remaining approximately 5% is composed of expert service revenue such as project consulting and product training.

Looking further, the main subscription revenue is composed of five major types of SaaS services, with each major segment having roughly equivalent revenue scale, including:

① Sales Cloud: The most core and earliest business of CRM, mainly various process management tools for the enterprise sales stage, such as customer contact, quotation, signing, etc.

② Service Cloud: Another core business of the company, mainly including various functions related to customer service, such as customer information management, online customer service, etc.

③ Marketing & Commerce Cloud: The marketing cloud provides systematic marketing functions through various channels such as search, social, and email; the commerce cloud mainly involves building virtual malls, order management, payment, and other functions required for e-commerce.

④ Integration & Analytics: Salesforce's internal database services and business analysis tools, mainly composed of MuleSoft and Tableau.

⑤ Platform & others: The infrastructure and services on which Salesforce's other SaaS services rely, similar to PaaS (Platform-as-a-service). It also includes team collaboration office services like Microsoft Teams or Slack, similar to Feisheng in China.

II. Excluding Exchange Rate Benefits, Growth Still Lacks Surprises

On the growth side, this quarter Salesforce's core business—subscription revenue was approximately $8.05 billion, up 10.6% year-on-year, showing some acceleration compared to 8.3% in the previous quarter, slightly exceeding market expectations by 1 percentage point. However, this is mainly due to the favorable tailwind of exchange rates. Over the past four quarters, the growth rate of subscription revenue at constant exchange rates has remained around 9%, with most of the growth fluctuations being due to exchange rate effects. (Since decimals are not disclosed, smaller differences may be erased).

Among the performance of the five major business lines,

1) This quarter, all business lines generally saw a 1% to 3% acceleration in growth compared to the previous quarter, with relatively consistent performance and no particularly outstanding ones. It can be seen that this is mainly due to the favorable exchange rate factors.

2) More specifically, the commerce and marketing cloud still showed the weakest growth, with only a 4% year-on-year increase, while the two most fundamental sales and service clouds had growth rates around 9%, which can be considered stable performance.

3) Since the platform cloud is the infrastructure for Salesforce services, when enterprises adopt Agentforce, they will default to using the platform cloud, so the platform cloud still showed the strongest growth, with a growth rate of nearly 17% this quarter. This reflects a certain driving effect of AI, but excluding the exchange rate benefits, there has been no significant improvement compared to before.

The data analytics segment continued to benefit from the acceleration in growth of the analytics tool Tableau to 15%, also leading the growth of traditional business lines.

This quarter's professional service revenue was approximately $550 million, still shrinking by about 2.7% year-on-year, with performance similar to the previous quarter, so Salesforce's total revenue this quarter was approximately $10.2 billion, up 9.8% year-on-year, with a growth rate of 9% excluding exchange rate effects, showing a slight acceleration of about 1 percentage point compared to the previous quarter.

II. Growth is Stable This Quarter, but Leading Indicators Weaken

The leading indicator reflecting future growth prospects—cRPO (short-term unfulfilled balance) nominal year-on-year growth rate this quarter was nearly 11%, down about 1 percentage point from the previous quarter, with a similar slowdown in growth at constant exchange rates. This quarter's cRPO net increase was $2.9 billion, with a net increase narrowing by nearly 10% quarter-on-quarter compared to the previous quarter. After reaching a stage high in the previous quarter, Salesforce's new contracts in Q2 actually weakened.

III. Favorable Exchange Rates Drive Improvement in Subscription Gross Margin

On the gross profit side, this quarter Salesforce's core business—subscription revenue gross profit was $8.05 billion, up 11.6% year-on-year, slightly outpacing the corresponding revenue growth rate.

It can be seen that this quarter's subscription business gross margin was 83%, with a slight increase of 0.3 percentage points quarter-on-quarter, and Dolphin believes that this should mainly be attributed to the favorable exchange rate. (Revenue growth is expanded due to exchange rates, while costs are mostly incurred domestically in the U.S., so they are not affected by exchange rates). From a longer perspective, the gross margin still maintains a steady slight upward trend with scale improvement and higher customer unit prices.

The more significant improvement is that this quarter the gross loss rate of service business returned to a more normal 9% from 22% in the previous quarter, so the gross loss amount also narrowed from $120 million to about $50 million.

Combined with the steady improvement in subscription business due to favorable exchange rates and scale effects, and the return to normal of service business's gross loss, this quarter Salesforce's total gross margin was 78.1%, increasing by 1.1 percentage points quarter-on-quarter.

IV. Cost Control Remains Excellent

From the expense perspective, this quarter Salesforce's total operating expenses were $5.66 billion, up 5.2% year-on-year, further slowing from 6.8% in the previous quarter, and significantly lower than the growth rates of revenue and gross profit. Therefore, even though the growth side did not perform outstandingly, controlling expenses still managed to squeeze out some profits. The expense rate decreased by nearly 2 percentage points quarter-on-quarter compared to the previous quarter.

R&D expenses increased by 9.8% year-on-year, also showing marginal acceleration, which should also be due to the investment in developing new functions such as AI agents. However, management expenses only increased by 3.2% year-on-year, which is the main focus of cost control.

As an important component of expenses for SaaS companies, one reason for the low expense growth this quarter is that stock-based compensation expenses were approximately $780 million, down 1.8% year-on-year, accounting for 7.7% of revenue, the lowest point in recent years except for Q4 FY24.

V. Growth Lacks Highlights, but Profits Can Still Be "Squeezed Out"

On the income statement, as mentioned above, the gross margin rebounded quarter-on-quarter due to favorable exchange rates, and the low single-digit expense growth also continued to release profit margins. Therefore, this quarter the GAAP operating margin increased by about 4 percentage points quarter-on-quarter to 22.8%, a record high.

Driven by this, this quarter's operating profit increased significantly by nearly 31% year-on-year, although revenue growth was not outstanding, profit growth was still good.

The company is more focused on free cash flow profit, which was only $610 million at the seasonal low, down 20% year-on-year, significantly below expectations. Of course, due to the low absolute value, the year-on-year decline in cash flow this quarter is mainly due to the impact of repaying more accounts payable, which is not a very significant guiding signal.